Estate Tax Exclusion Portability Election: Step by Step

Photo of author

Paul Sundin, CPA

Do you have an estate plan?

We'll show you our favorite strategies

Estate tax planning can be complex. There are many options and exclusion when it comes to minimizing estate tax liabilities.

In this post, we will discuss probably the most important estate tax election – the estate tax portability exclusion. This is probably the #1 estate planning concept for married couples.

The Basics of Portability

Portability essentially allows two spouses to combine their estate exclusions together into one large exemption. There is not as much need to split the exclusions and have the estate of the first spouse to pass away get allocated into a credit shelter trust or bypass trust.

If you elect Portability, the assets will receive a basis step-up at the surviving spouse’s death. Assets that would pass to a bypass trust or credit shelter trust would not be allowed this benefit.

The step-up in basis could save tax on the increase between the asset’s value upon the death of the first spouse and the value at the death of the surviving spouse. The downside is that the estate tax will be assessed on the appreciation (if you are subject to it).

The most significant advantage portability has to offer is its simplicity. It may now be practical for many couples to leave all assets to a surviving spouse, either outright or in trust, and still retain the unused exclusion amount from the first spouse to pass away.

Estate Tax Exclusion Portability

Many clients may think it is unnecessary to elect Portability at the first spouse’s death because the surviving spouse’s estate is not even close to the current exclusion amount. They may also feel that the Federal Estate Tax may be repealed entirely under the new administration. However, it is always possible that the exclusion amount could decrease significantly from its current high amount or that a future administration could reinstate the Federal Estate Tax.

Scrabble pieces spelling TAX

This new option is beneficial, though, like any other estate planning tool, Portability is not a cure-all. For instance, it does not apply to the Generation-Skipping Transfer Tax (GST) exemption. Remember, though, that individual exclusion is adjusted annually for inflation. But once the remaining unused exemption is transferred to the surviving spouse, the amount does not change as time passes.

Estate Tax Planning for Married Couples

When couples have assets less than the exclusion amount, Portability is a very convenient option. It can save costs by eliminating the need for an irrevocable trust to split assets to maximize their individual exclusions.

For many couples, a significant concern in their estate planning has been a primary residence, representing a substantial portion of their wealth. Previously, a couple could have transferred assets to one another, depending on which spouse potentially died first. In addition, a spouse might leave their stake in the house to a trust. This creates additional time and expense relating to the administrative headaches for the surviving spouse and with or in allocating costs and tracking payments. Portability eliminates the need for more complex estate planning.

Exclusion Filing Requirements

The executor is then required to file a complete and accurate Form 706 on or prior to the second anniversary of the decedent’s date of death and

The executor filing Form 706 on behalf of the decedent’s estate must state this at the top of Form 706:

When filing Form 706, the tax return assumes that you elect Portability. If you choose to opt-out, you must choose to do so on page 4, Part 6, Section A.

Taxes written on hanging tags

The good news is that a surviving spouse does not have to file Form 706 when the estate’s gross value (which includes prior taxable gifts) is less than the basic exclusion amount. But the IRS allows executors filing solely to elect Portability of the DSUEA not to disclose and report values of certain assets that are eligible for the marital deduction or the basic charitable deduction.

However, the values must be estimated and included in the calculation total of the entire gross estate. The property assets can be rounded to the nearest $250,000 but do not have to be disclosed on the recapitulation included in Form 706 in Part 5.

Closing Thoughts

The portability exclusion is probably the #1 planning strategy for married couples. The concept itself is rather simple, but there are plenty of issues to consider.

Most estate professionals believe that there is no downside to electing the portability exclusion. But this is not the case. While it is a home run for most folks, there are some downsides that need to be considered.

Make sure that you review your estate plan with qualified tax and legal professionals. Federal estate laws are constantly changing, so make sure you stay on top of it.

Leave a Comment

We know that estate planning can be complex. That's why we are there every step of the way.


Estate CPA

Gilbert, AZ